I.
OVERVIEW OF FINANCIAL PLAN Budget planning enables you to build your net worth by
PERSONAL FINANCE is the process of planning your
spending, financing, and investing to optimize your
financial situation.
defined as all financial decisions and activities of
an individual or household, including budgeting,
insurance, mortgage planning, savings and retirement
planning.
A personal financial plan specifies your financial goals
and describes the spending, financing, and investing
plans that are intended to achieve those goals.
- does not require a genius mind, but does
require the use of common sense and discipline
- result increases your wealth, and allows you to
more easily afford purchases
- Conversely, poor personal finance decisions can
cause you to borrow excessively
As you build your financial plan, you are developing
skills that enhance your employability. When you make
personal finance decisions, you are managing yourself.
Self-management
- can take the initiative to make decisions.
In addition, personal finance decisions require weighing
tradeoffs of alternative options and problem solving
(qualitative and quantitative)
COMPONENTS OF A FINANCIAL PLAN
1. Budgeting and tax planning
2. Managing your liquidity
3. Financing your large purchases
4. Protecting your assets and income (insurance)
5. Investing your money
6. Planning your retirement and estate
BUDGETING AND TAX PLANNING
- Process of forecasting future expenses
and savings. Evaluate your current financial position by
assessing your income, your expenses, your assets
(what you own), and your liabilities (debt, or what you
owe). Your wealth is measured by your Net Worth.
Net Worth = Assets (what you own) – Liabilities (what
you owe) As you save money, you increase your assets
and therefore increase your net worth.
setting aside part of your income to either invest in
additional assets or reduce your liabilities.
MANAGING LIQUIDITY
Liquidity - access to funds to cover any short-
term cash needs
1. Money management involves decisions regarding
how much money to retain in a liquid form (to avoid
cash shortages because of unanticipated expenses) and
how to allocate the funds among short-term
investments.
2. Credit management involves decisions about how
much credit you need to support your spending and
which sources of credit to use. Credit is commonly used
to cover both large and small expenses when you are
short on cash, so it enhances your liquidity.
FINANCING LARGE PURCHASES
Managing loans includes determining how much you
can afford to borrow, deciding on the maturity (length
of time) of the loan, and selecting a loan that charges a
competitive interest rate.
PROTECTING ASSETS AND HOME
To protect your assets, you can conduct insurance
planning, which determines the types and amount of
insurance that you need.
- Automobile insurance
- Homeowner’s insurance
- Health insurance
- Disability and life insurance (income)
INVESTING MONEY
Any funds that you have beyond what you need to
maintain liquidity should be invested with the primary
objective of earning a high return.
Potential investments include stocks, bonds, mutual
funds, and real estate. You must determine how much
of your funds you wish to allocate toward investments
and what types of investments you wish to consider.
Most investments are subject to risk (uncertainty
surrounding their potential return), however, so you
need to manage them so that your risk is limited to a
tolerable level.

RETIREMENT & ESTATE PLANNING
Retirement planning involves determining how much
money you should set aside each year for retirement
and how you should invest those funds.
Estate planning is the act of planning how your wealth
will be distributed before or upon your death.
PSYCHOLOGY OF PERSONAL FINANCE
Instant Gratification & Peer Pressure
- This causes them to spend excessively, meaning
that they make purchases that are not
necessary.
- tend to make many impulse purchases
Discipline & Focus on the Future
- strong desire to avoid debt because they would
feel stress from the obligation of making large
debt payments
- by spending conservatively today, they will have
additional money available that they can use for
financial planning functions to improve their
financial future
Assess Your Own Spending Behavior
- If you spend excessively now to achieve
immediate satisfaction, you have no money left
to direct toward financial planning functions
such as managing liquidity, insurance, investing,
or retirement planning.
DEVELOPING FINANCIAL PLAN
1. Establish financial goals
2. Consider your current financial position
3. Identify and evaluate alternatives
4. Select and implement the best plan
5. Evaluate your financial plan
6. Revise your financial plan
II. PERSONAL FINANCIAL STATEMENTS
Financial Roadmap
1. Financial Organization
2. Saving
3. Career/Work Income
4. Spending
5. Investing
6. Tax
7. Insurance/Protection
8. Retirement Planning
Financial plans are the road maps that show you the
way, whereas personal financial statements let you
know where you stand.
Budgets, detailed short-term financial forecasts that
compare estimated income with estimated expenses
- allow you to monitor and control expenses and
purchases in a manner that is consistent with
your financial plans.
PERSONAL FINANCIAL STATEMENTS
- planning tools that provide an up-to-date
evaluation of your financial well-being, help you
identify potential financial problems, and help
you make better-informed financial decisions.
- a document, or set of documents, that outlines
an individual’s financial position at a given point
in time
- helpful for tracking wealth and goals, as well as
applying for credit
Balance Sheet
- describes your financial position—the assets
you hold, less the debts you owe, equal your
net worth (general level of wealth)—at a given
point in time
- helps you track the progress you’re making in
building up your assets and reducing your debt
Income Statement
- measures financial performance over time
- tracks income earned, as well as expenses
made, during a given period
- helps you control your future expenses and
purchases so you’ll have the funds needed to
carry out your financial plans
Budgets
- allow you to monitor and control spending
because they are based on expected income
and expenses
Cash Budget
- deals with estimated cash receipts and cash
expenses, including savings and investments,
that are expected to occur in the coming year or
months
Cash budget preparation has three stages:
 estimating income,
 estimating expenses, and
 finalizing the cash budget
 Liabilities represent an individual’s or family’s debts. A
liability, regardless of its source, is something that you
owe and must repay in the future.
THE INTERLOCKING NETWORK OF FINANCIAL PLANS
AND STATEMENTS Current, or short-term, liability: Any debt currently
owed and due within 1 year of the date of the balance
sheet.
Examples include charges for consumable goods, utility
bills, rent, insurance premiums, taxes, medical bills,
repair bills, and total open account credit obligations —
the outstanding balances against established credit lines
(usually through credit card purchases).

Long-term liability: Debt due 1 year or more from the

date of the balance sheet. These liabilities typically
include real estate mortgages, most consumer
ASSETS: The things you own
installment loans, education loans, and margin loans
used to purchase securities.
Liquid assets: Low-risk financial assets held in the form
of cash or instruments that can readily be converted to
NET WORTH: A measure of financial worth
cash with little or no loss in value. They help us meet
the everyday needs of life and provide for emergencies
Net Worth, the amount of actual wealth or equity that
and unexpected assets.
an individual or family has in owned assets.
- amount of money you’d have left after selling
Household assets include items normally owned by a
all your owned assets at their estimated fair
household, such as a home, car, and furniture.
market values and paying off all your liabilities

Investments: Assets acquired to earn a return rather

FACTORS AFFECTING CASH INFLOWS
than provide a service. These assets are mostly
intangible financial assets (stocks, bonds, mutual funds,
1. Stage in Career Path (Closely related to your
and other types of securities), typically acquired to
stage in the life cycle – college, career,
achieve long-term personal financial goals.
retirement
2. Type of Job (Based on skill level and demand for
Real and personal property: Tangible assets that we use
those skills)
in our everyday lives.
3. Number of Income Earners in the Household

Real property refers to immovable property: land and

FACTORS AFFECTING CASH OUTFLOWS
anything fixed to it, such as a house. Real property
generally has a relatively long life and high cost, and it
1. Size of Family
may appreciate, or increase in value.
2. Age
3. Health
Personal property is movable property, such as
4. Personal Consumption Behavior
automobiles, recreational equipment, household
furnishings and appliances, clothing, jewelry, home
INCOME STATEMENT: What we earn and where it goes
electronics, and similar items.
The income and expense statement captures the
various financial transactions that have occurred over
LIABILITIES: The money you owe
time—normally over the course of a year, although it
technically can cover any time period (month, quarter,
and so on).

3 Major Parts:
 Income
 Expenses
 Cash Surplus (Deficit)
INCOME: Cash In
Common sources of income:
 wages, salaries, self-employment income,
bonuses, and commissions;
 interest and dividends received from savings
and investments;
 proceeds from the sale of assets such as stocks
and bonds or an auto.
 other income items include pension, annuity,
and Social Security income;
 rent received from leased assets;
 alimony and child support;
 scholarships or grants;
 tax refunds; and
 miscellaneous types of income.
EXPENSES: Cash Out
Expenses represent money used for outlays.
(1) living expenses (such as housing, utilities,
food, transportation, medical, clothing, and
insurance),
(2) tax payments,
(3) asset purchases (such as autos, stereos,
furniture, appliances, and loan payments on
them),
(4) Payments for personal care, recreation &
entertainment
EXPENSES: Cash Out
Fixed expenses—usually contractual, predetermined,
and involving equal payments each period (typically
each month). Examples include mortgage and
installment loan payments, insurance premiums,
professional or union dues, club dues, monthly savings
or investment programs, and cable TV fees.
Variable Expenses—amounts change from one time
period to the next such as food, clothing, utilities,
entertainment, and medical expenses
USING PERSONAL FINANCIAL STATEMENTS
 Keep good recordkeeping system (organized
and up-to-date)
 Track down Financial Progress: Ratio Analysis
III. MONEY MANAGEMENT
Money management describes the decisions you make
over a short-term period regarding your cash inflows
and outflows
- separate from decisions about investing funds
for a long-term period (such as several years) or
borrowing funds for a long-term period
- focuses on maintaining short-term investments
to achieve both liquidity and an adequate
return on your investments
Liquidity refers to your ability to cover any short-term
cash deficiencies
- company's ability to convert assets to cash or
acquire cash—through a loan or money in the
bank—to pay its short-term obligations or
liabilities
Cash is the most liquid of assets, while tangible items
are less liquid.
Tangible assets, such as real estate, fine art, and
collectibles, are all relatively illiquid. Other financial
assets, ranging from equities to partnership units, fall at
various places on the liquidity spectrum.
Current ratio, quick ratio, and cash ratio are most
commonly used to measure liquidity.
MONEY MARKET INSTRUMENTS
1. Checking account
2. NOW account
3. Savings deposit
4. Certificate of deposit
5. Money Market deposit account (MMDA)
6. Treasury bills
7. Money market fund
8. Asset management account
CHECKING ACCOUNT
- deposit account with a bank or other financial
firm that allows the holder to make deposits
and withdrawals
- very liquid, allowing for numerous deposits and
withdrawals, as opposed to less liquid savings
or investment accounts
- tradeoff for increased liquidity is that checking
accounts don’t offer interest
 - important to keep track of checking account
fees, which are assessed for overdrafts.
NOW Account
NOW (negotiable order of withdrawal) account - a type
of deposit offered by depository institutions that
provides checking services and pays interest.
- combines the payable demand feature of
checks and investment feature of savings
account
SAVINGS ACCOUNT
A savings account is a deposit account held at a financial
institution that provides principal security and a modest
interest rate
 Because savings accounts pay interest while
keeping your funds easily accessible, they’re a
good option for emergency or short-term cash.
 In exchange for the ease and liquidity that
savings accounts offer, you’ll earn a lower rate
than that paid by more restrictive savings
instruments and investments.
 The amount you can withdraw from a savings
account is generally unlimited.
 The interest you earn on a savings account is
considered taxable income
CERTIFICATE OF DEPOSITS
A certificate of deposit (CD) is a savings product that
earns interest on a lump sum for a fixed period of time.
CD’s must remain untouched for the entirety of their
term or risk penalty fees or lost interest. CDs usually
have higher interest rates than savings accounts as an
incentive for lost liquidity
 CDs are a safer and more conservative
investment than stocks and bonds, offering
lower opportunity for growth, but with a non-
volatile, guaranteed rate of return.
 The top nationally available CD rates are
typically three to five times higher than the
industry average for every term, so shopping
around delivers significant gains.
 Although you lock into a term of duration when
you open a CD, there are options for exiting
early should you encounter an emergency or
change of plans
MONEY MARKET DEPOSIT ACCOUNT (MMDA)
A money market deposit account (MMDA) is a deposit
account offered by a depository institution that requires
a minimum balance to be maintained, has no maturity
date, pays interest, and allows a limited number of
withdrawals per month.
Treasury Bills or popularly known as T-Bills are peso-
denominated short-term fixed income securities issued
by the Republic of the Philippines through its Bureau of
Treasury.
- get the interest in advance
- practically risk free since it is ssued by the
Republic of the Philippines
- carries its obligation to pay investors on
maturity dates
- Original tenors are 91, 182 and 364 days
- can sell the Tbills in the Fixed Income Market
through prevailing market rate before the
security matures
MONEY MARKET FUNDS
A money market fund (also called money market mutual
funds) is a kind of mutual fund that invests in highly
liquid, near-term instruments. These instruments
include cash, cash equivalent securities, and high-credit-
rating, debt-based securities with a short-term maturity,
typically less than 90 days.
An asset management account combines deposit
accounts with a brokerage account that is used to buy
or sell stocks.
RISK OF MONEY MARKET INVESTMENTS
Credit Risk, also referred to as default risk, is the risk
that the borrower will not repay on a timely basis. The
borrower may make late payments or even default on
the credit. In that event, you will receive only a portion
(or none) of the money you invested.
Interest Rate Risk, is the risk that the value of an
investment could decline as a result of a change in
interest rates.
Liquidity Risk, is the risk that the value of an investment
could decline as a result of a change in interest rates.